Price per square foot is not the holy grail of property value

Price per square foot is media darling of value

price-per-square-foot-weakness

While scanning the news headlines this week I ran across an article titled “What Is the Average Price per Square Foot for a Home — and Why Does It Matter?” Because I am an appraiser this caught my eye for various reasons.

The article pointed out that you can use the average price per square foot of the sales in the neighborhood to gauge whether you are getting a good deal when buying a house. I have a problem with this because it places too much emphasis on a stat that does not tell the whole story of a property’s value.

The first and foremost goal of my blog is to inform and educate the public about appraisals as well as why and how appraisers do what they do. This includes clarifying confusing information that consumers may have about the appraisal profession or about their homes value.

More things to consider

Narrowing down the value of a property based only price per square foot, such as what was eluded to in the article, does not tell the whole story. When you only look at the price per square foot metric you don’t take into consideration variations in the type of properties that are in a neighborhood.

The price per square foot relies heavily on having accurate information about the gross living area of the comparables, which is not always known. Lastly, when you look ONLY at price per square foot you place more emphasis on the moving target of value as opposed to the more reliable physical attributes of the property.

Value can be a moving target because most people have in their mind a preconceived notion of what their home is worth and this can lead them into choosing sales that support the value they want.

I’m interested in educating the public about the fallacies of only looking at price per square foot because it can lead to inaccuracies when estimating the value of your home, especially when you use it to arrive at an asking price for your home.

Price per square foot can provide a reasonable estimate of value in certain situations. If there is a high degree of similarity among houses in the neighborhood with regard to size, quality, design, and appeal then looking at price per square foot can give you a reliable range of value.

When properties are similar, the need to make adjustments is reduced. If all of the houses are on similar size lots, have the same number of bedrooms and bathrooms, are close in age, and are similar in living area then looking at the price per square foot may give you a range of value that you can then use to reconcile a value for your property.

When there are more variations in the elements of comparison this will impact the price per square foot. For example, a larger home will sell for less per square foot when everything else is similar and a smaller home will sell for more.

A home that has a finished basement will sell for more than a similar home without a basement. This is important because if you only look at price per square foot you may use a value indicator that does not accurately reflect your home’s true value.

The one thing you must know

Even if you have comparable sales that are similar in most regards you must make sure that you know exactly how big they are in terms of gross living area (GLA). The GLA is what appraisers use when arriving at a price per square foot in their appraisal reports. You must have accurate square footage in order to calculate the price per square that you use to come up with your home’s value.

If the GLA of your comparable sale is wrong and your price per square foot is wrong by as little as $10 this can cause the value estimate for your home to be off by $10,000 for a 1,000 square foot home.

When you only look at price per square foot you don’t necessarily take into consideration all of the other physical attributes of the home. These physical features of your home should be what you use to “bracket” the sales during comp selection because the features of a property are what drives value.

Rather that looking at the average price per square foot of ALL the sales in a neighborhood you should do a comp search by picking those sales that are similar in the size, age, condition and features of your home because the price per square foot that they sell for will reflect the similar features that your home has.

Below you will see a typical sales comparison grid from a recent appraisal I did. My comp search consisted of bracketing the physical features of the property. As a result the price per square foot was fairly close and consistent. There were small variations, mainly because of differences in age, condition.

price-per-square-foot-grid

A search of the neighborhood without regard to any physical differences resulted in a range in price per square foot from $48 to $108. The spread of $60 from the lowest to the highest leaves a lot of room for error. This range is because of the variations in physical characteristics like I mentioned previously such as size, bedroom/bath count, age, etc.

Looking at all sales is using a shotgun approach but bracketing the physical characteristics of the property and narrowing your search down is more like using a rifle because the results are more closely targeted and accurate. This will provide a more accurate value indication and will help sell the home more quickly because the home is priced to the market.

Question

Does it make sense that using additional criteria besides price per square foot can help you arrive at a more accurate value estimate? Can you add anything else? If so leave your thoughts below and we’ll keep the conversation going. As always, thanks for reading.

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Comments

  1. Bill Temple says:

    Tom, thank you for pushing this topic to the forefront. We deal with this constantly. I explained it like this. I have two numbers that are almost exactly the same. However, one is the price per pound of a Ford F-150 pick up and the other is a BMW 3-Series sedan. When I brought this up at a local real estate office, you could see the puzzled looks. Try and value that Hyundai Santa Fe with this same logic and see how it goes. After that, there was a lot more interest in how to properly use MLS tools for a CMA instead of the old P/SF method.

    • Great story Bill! That is a great example and I am glad we are getting out into the public and talking about these things. Sometimes it’s easy to sit back and complain about people who don’t understand these things but I believe that agents really want to know this stuff so they can price their listings to get them sold. The more they know how we look at things and how appraisals work the better they will be at pricing homes, which decreases the likelihood of deals falling through.

  2. Tom,
    I use the analogy when asked this question; What is the average price of a cubic foot of a vehicle? Well, depends if the car is a Yugo or a Mercedes. Both may have the same cubic footage but surely the price per cubic foot will be quite different.

    • That’s a great analogy Samuel. The more we help explain it to owners and agents in these types of terms the better they will understand everything that goes into the price per square foot.

  3. Thank you for the article Tom. I agree, price per square foot is dangerous, particularly when it is the only unit of comparison applied to determine an offer or asking price on a home.

  4. Price per sq ft is a dangerous metric if you don’t know how to use it. My sense is the public has not been trained for how to use price per sq ft, and they don’t realize there is a price per sq ft spectrum in a neighborhood too. For example, there is a local neighborhood in Sacramento where price per sq ft ranges from $200 to $550 depending on the house and street. The smaller-sized homes actually command a much higher price per sq ft than the larger ones too. Does the public know these things? I’m not sure this is common knowledge. Thanks Tom. Keep up the great work.

    • I agree Ryan, and when agents or the media focus on price per square foot it gives the public the wrong information. I think this is why it is very important for appraisers to speak at agents offices or be on the MLS board. By being present and available we can educate the public about what we do. Phil Crawford mentioned this on his show because the more everyone knows what we do the less likely they may be to sue us.

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